A Media Blitzed

Everything was going just fine for Mexico’s entertainment industry until Dec. 19. Television revenues were higher than ever, U.S. film distributors were looking at record billings, fresh coin was pouring into the burgeoning cable TV arena, and the economy was set to grow a sturdy 4% in 1995.

But a groaning trade deficit spelled trouble, and when armed rebels started taking over towns in the south, foreign investors began to bolt. The ensuing currency devaluation – a 57% drop in the peso by Jan. 5 – has caused consternation and confusion in almost every sector of the entertainment industry.

Televisa’s losses were the most visible. The media giant, a Wall Street favorite since its December 1991 flotation, saw its American Depositary Shares at the end of 1994 down 55% on the year – a drop 10% worse than that sustained by the average Mexican firm listed in New York.

A company that depends on two-thirds of its revenue from advertising sales, Televisa faces a 1995 marred by considerable consumer restraint, as inflation takes its toll.

Worse still, the conglom must eat up huge foreign exchange losses (as yet undisclosed). Contrary to conventional wisdom, little of the 3.4 billion peso loan (then $1 billion) that Televisa obtained from Mexican banks last August was used to reduce its exposure to currency fluctuations, says a Mexico-based analyst who asked not to be named.

But the picture is not necessarily that bleak for Latin America’s preeminent media group. To start, Televisa usually makes 85% of its ad sales through a pay-in-advance scheme, and the latest annual plan closed before the peso plummeted.

Indeed, upfront ad revenues last fall were up 12% to 15% from 1993, according to Lilia Barroso, media director of J. Walter Thompson-Mexico. In contrast, smaller broadcast rival TV Azteca, whose upfront income typically represents less than 50% of its total ad sales, will suffer much more, Barroso said.

Moreover, investors displayed their long-term confidence in Televisa on Jan. 4, when holders of the company’s Euro Medium-Term Notes voted to allow Televisa to exceed the level of indebtedness initially permitted by the covenant to the notes.

“Televisa had been prepared to call the whole issue in,” says an industry source. “They were hoping the investment community would understand that their business is solid.”

Depending on government success in curbing inflation and runaway interest rates, the crisis may thus postpone rather than cancel Televisa’s expansion plans for 1995. Such plans still include the acquisition of a stake in Spanish web Tele Cinco (Daily Variety, Oct. 17), according to a well-placed source.

Less happy are the country’s pay TV operators (including Televisa subsid Cablevision), who face huge cost increases for their imported channels. But some U.S. programmers privately concede that at least some fees will come down, since operators otherwise will be forced to drop channels.

For investors hoping to ride the wave of long-projected pay TV growth, the picture is cloudier. “It’s too early to say whether Mexicans will say they can’t afford pay TV now, or whether they’ll now consider it cheaper than other entertainment options,” says Clive Fleissig, international VP of Falcon Cable.

Falcon entered Mexico a year ago, investing in the Tijuana-centered Telecab group. “It’s likely there’ll be a temporary halt to some activities, but I’m still optimistic about Mexico,” Fleissig said.

Elsewhere, Mexico’s theater chains have pledged not to raise ticket prices for the time being. The assurances came as a relief to distributors, who feel that ticket prices – which shot up in 1993 after being liberated from decades of state control – were too high to begin with.

But theater operators won’t be able to resist price hikes for long. Spurred by an imminent wave of U.S. multiplexes, principal chains COTSA and Grupo Ramirez are engaged in massive development strategies, necessitating large amounts of dollar-denominated equipment. While Ramirez is cash-rich, COTSA faces a considerably heavier interest rate burden, sources say.